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With their low down payments and credit requirements, FHA mortgages experienced a surge in popularity as other lending dried up in the wake of the housing market crash. More recently, however, they’ve lost some of that luster as a series of fee increases have made them a less attractive option than they were a few years ago.

Now, the FHA is trying to restore some of their appeal by giving borrowers an opportunity to scale back some of those fee increases through a pilot program called FHA HAWK. Standing for Homeowners Armed With Knowledge, it will enable first-time homebuyers who receive housing education and counseling to reduce the fees they pay for FHA mortgage insurance.

Here’s how it works: First-time homebuyers who want to take advantage of the program sign up for and participate in a three-part education and counseling program from a HUD-approved nonprofit housing agency. In return, the upfront premium charged for FHA mortgage insurance will be reduced from 1.75% of the loan amount to 1.25%.

In addition, they’ll also get a 0.10 percentage point reduction in their annual mortgage premium, which presently runs as high as 1.35%. If they keep up with their mortgage payments for 18 months, with no 90-day delinquencies, they’ll receive a further 0.15 percentage point reduction starting in the 25th month of the loan.

The pilot program is scheduled to begin on Oct. 1, 2014 and last for four years. It’s estimated to save buyers with an FHA-average $180,000 mortgage $325 a year, or $9,800 over the life of a 30-year loan.

Getting an Education on Your Mortgage

The FHA says it is undertaking the program to expand access to mortgage credit for underserved borrowers. According to its figures, first-time homebuyers who participate in housing counseling and education programs are 30% less likely to default or be delinquent on their loans than those who do not.

The education and counseling elements will be provided in three parts. Prospective borrowers must undergo a minimum of six hours of pre-contract education and counseling that must be completed at least 10 days before a purchase agreement is signed. They must undergo another hour of counseling after the contract is signed but prior to closing the loan, and a final hour of post-purchase counseling within the first year of owning the home.

The education element of the program may be provided in a group or classroom session, through online instruction or other formats. Counseling will be tailored to borrowers’ unique circumstances or financial challenges.

Depending on the agency providing the service, borrowers may have to pay for their education and counseling sessions. The National Association of Realtors estimates these could run as high as $300-$500 for the whole program, although these could be subsidized or reimbursed, according to the FHA. Actual fees will be set by the individual agencies providing education and counseling services, subject to FHA guidelines.

The program is being introduced in two phases. During the first phase, the program will be limited to select lenders and housing agencies who have been invited to participate. In the second, the program will be opened up to all FHA-approved lenders and HUD-approved housing agencies who wish to take part.

The lists of approved lenders and counselors chosen for Phase I of the program has not yet been released. Names and contact information for HUD-approved housing counselors who will be eligible for the program can be obtained on the HUD website.

For FHA-approved lenders in your area, visit the HUD Lender List page; most major banks and many local banks and mortgage brokers are FHA-approved.

In the lead-up to getting a mortgage, it’s also important to know what condition your credit is in. Checking your credit reports at least several months in advance of looking for a home can give you time to correct any mistakes or address problems that could be hurting your credit. Checking your credit scores during this period can help you gauge your standing, and determine whether you’ll be able to qualify for an FHA loan, or if you need to take some time to work on improving your credit. You can check your credit reports for free once a year through AnnualCreditReport.com, and you can use a service like Credit.com to monitor your credit scores every month for free.

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Image: David Sacks

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